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Tuesday, December 26, 2006

Hungary Vital Events 2006

The latest edition of the Hungarian CSO "Vital events" (January-October 2006) is now out, and it contains the following interesting information:

In the first ten months of 2006 the degree of population decline was much lower than in January-October 2005. The number of live births moderately increased, but there were significantly fewer deaths than one year before. Slightly fewer couples got married than in the same period of the previous year.

Looking at the above chart (where the thick solid line represents deaths, while the thick dotted line represents births, which are, of course consistently below deaths, a situation which has been going on since around 1990) my first response is that this is what I had feared.

Now I need to be careful here, since what I had feared is that the Hungarian population has started declining more slowly of late, largely due to a reduction in the number of deaths, rather than a significant and sustained increase in births. Obviously the fall in the number of deaths is GOOD news, but if this is the only way the population stabilizes, then the economic impact will be substantial and very negative.

For the sorts of reasons I have been recently arguing on Demography Matters, Hungary badly need a significant influx in immigrants, and immigrants who preferably come from countries where there is still relatively high fertility (eg Ukraine, Moldova, Russia, Serbia etc are not the best sources, since they also have near rock bottom fertility). Which is why Hungary badly doesn't want a short term economic crisis. Unfortunately here, what will be will be.

Basically as I argued in my Ferenc Puskás post most of the people who are living longer (and will be living longer in the future) have already stopped work, and this upward movement in life expectancy is going to be medically driven (rather than coming from better food, or from a healthier lifestyle etc) so the increase comes with a big price tag, and to pay this you need lots more young people working. This is the difficulty.

Having said all this there was a big spike in deaths in early 2005, so the drop in deaths may not be as large as it seems, otoh in secular terms, with life expectancy almost bound to rise, this is the direction we should expect to see things moving.

At the end of the day there are not only less people alive in Hungary in October 2006 compared with October 2005, but those people are, on average, older. It is this trend that it would be nice to try and stabilize a bit.

To understand all this it is important to have both quantum and tempo effects clear in your head for both births and deaths.

Birth postponement and increase in life expectancy operate together to produce both 'missing births', and 'missing deaths', and this twin phenomenon gives a rather illusory situation where the actual numbers you see really don't mean too much.

Now according to the first article in this piece, mean age at first birth in Hungary is still very low ( 22.4 - 23.9 range, you can also find more material on tempo and quantum in this document). Now since the EU norm in terms of first birth ages is fast moving towards the 30 mark, this means Hungary has considerable postponement out there in front of it, and probably a couple of decades of 'missing births' which can do untold damage to the population pyramid (which is already in none too good shape).

Add to this that we can expect a pretty intense increase in life expectancy, and you can see that the combined effect will be a very rapid increase in the median age. I can't do the math in my head, but I think this is clear.

Also if we look at the live births data, the peak generation was probably the 1970 -ish one, but that the cohorts before this (1960s, 1950s, 1940s) are probably also pretty large.

Now given the low first birth age we could imagine that it is the cohort born around 1980 (which was still pretty big) which are now having their children (in the main - or should I say child). Now if we fast forward to 2025 then even if fertility doesn't change, and even without allowing for postponement, births could be down 25% in absolute terms due to the lower number of potential parents, while imagining that the rate of increase in life expectancy might slow at some point, the missing deaths will come online. This is how population 'meltdown' works, and it is most definitely a non-linear phenomenon.

All in all then, hardly encouraging news.

Sunday, December 17, 2006

Savings In Hungary

One worrying feature of Hungarian society, people don't have too many accumulated savings to draw down as they age:

As many as 81% of Hungarians have no financial investment whatsoever and the majority of their existing investments are in short-term bank deposits, according to the latest market research of GFK Hungária Kft released on Friday.

A total of 40% of consumers surveyed said they were expecting to save significantly less next year and only 2% said they would be able to save significantly more. Around 31% expect to be able to save as much as before and 23% said savings would probably decrease slightly in the next 12 months.

Saturday, December 02, 2006

Hungarian PMI November

Hungary's seasonally adjusted Purchasing Manager Index (PMI) dropped to 51.7 in November, this was a reduction of 2.7 from the October reading which was 54.8, according to the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM), the publisher of the index. Since any reading over 50 means that output is still expanding this is still not a contraction reading, but it is hardly good news since it means industrial output (and in particular output for exports) is slowing, just what isn't needed at this point:

Monday, November 27, 2006

A Bad Decision?

Interest Rates: Hungarian central bank (NBH) Governor Zsigmond Járai is quoted on Wednesday as saying that "It was a bad decision...A 25 basis point hike would have signaled that we are defending the inflation goal".

The problem is, what do you do when there are very few good decisions available. Raising rates holds inflation, but raises the forint (which makes exporting difficult) and raises the cost of government borrowing (incidentally there are a hell of a lot of short term bonds changing hands at the moment).

Meantime Járai reasserts his commitment to price stability:

Hungary's central bank (NBH) has not given up its aim of price stability as it is trying to prevent that an economic slowdown comes with rising inflation, Governor Zsigmond Járai said on Wednesday.

"The following period will be an era of uncertainties with toned down growth and inflation risks. The objective of the central bank is to avoid staglflation and so it does not give up its endeavours to reach price stability, Járai told a conference.

The NBH's Monetary Council decided to keep the base rate on hold at 8.00% on Monday, after five successive monthly rate hikes of 200 basis points in total, but Járai said that an interest rate hike was still on the cards.

"If we see that the inflation target is in danger, the NBH will tighten monetary policy," Járai said.

The bank in its quarterly inflation report cut its forecast for 2008 average annual inflation to 4.1% from 4.2%, above its medium-term target for 3%, confusing some analysts who had expected a rate hike.

At the same time, the NBH slashed its core inflation forecast for 2008 to 4.0% from 4.4%.

Thursday, November 23, 2006

Flextronics Reduce Staff

Obviously it is impossible for me to comment on individual cases, and the reasons why Flextronics lost their order with the 'important client' which means that 30% of the 2,000 odd workforce will now be laid off. I would simply say that if you look at the comparatively high value of the forint, and take into account the rather high rate of inflation, then this type of problem is only to be expected.

Flextronics International Ltd., the world's largest manufacturer of custom-made electronics, is firing about 30% of staff at one of its four Hungarian plants after losing a major client.

About 2,000 permanent and temporary employees currently work at the factory in Nyiregyháza, northeast Hungary, Péter Papp, the director of human resources for eastern Europe, said in a telephone interview today. “We have hired more than 1,000 workers in the past six months at the plant and with this major client taking away production we need to cut jobs,” Papp said. “The dismissal of 590 by early February is the worst-case scenario because we'll try to help them find jobs within the company.” Flextronics also has plants in Tab, southwest Hungary, Zalaegerszeg in the west and Sárvár in the northwest. The company will employ just under 10,000 after the Nyiregyháza dismissals, Papp said, adding the company will remain one of the Hungary's 10 largest employers. Papp declined to identify the client that canceled its contract or say which product Flextronics made for it, except that it was sold in large volumes around Christmas. Napi Gazdaság reported the job cuts news earlier today.

Lajos Bokros the Hungarian Cavallo?

Domingo Cavallo is perhaps best known to economic history as the financial supremo who leaped to the headlines during his term as Argentina's Economy Minister in 2001 as he battled with the looming economic crisis which finally burst in January 2002. (Not everyone of course shares this view and an alternative point of view on Domingo Cavallo can be found here).As Robert Barro noted:

In March, 2001, President Fernando de la Rúa's new Economy Minister, Ricardo López Murphy, failed when a reasonable program of curtailing public spending hit a political roadblock. Now there is talk in the markets of default on Argentina's foreign debt.

Out of desperation, the President has turned to his political rival, Cavallo, to save the economy a second time.

Now it seems Lajos Bokros is offering himself for a somewhat similar role in the context of Hungary's growing economic crisis. Of course, the parallels do not end there, since Cavallo was also the architect of Argentina's economic reform process during his tenure at the Ministry in 1991:

Things changed in 1991, when Domingo Cavallo took over as Economy Minister. His reforms were pro-market and featured fixing the peso at 1-to-1 parity with the U.S. dollar. He also pushed trade liberalization and reforms of public finance and the banking system. Despite the recession of 1995, induced by the Mexican peso crisis, Argentine per capita GDP grew at an average rate of 4.8% during the Cavallo years, through 1996.

And of course Lajos Bokros - currently Chief Operating Officer and professor of the Central European University (CEU) - was Finance Minister and father of an aggressive austerity package back in 1995:

Lajos Bokros, Hungary's former Finance Minister and the father of an aggressive but inevitable austerity package in 1995, said he would assume the position of Prime Minister if he was allowed to execute his own adjustment programme.

Bokros, who is currently Chief Operating Officer and professor of the Central European University (CEU), also said the country is in a political and moral crisis in respect of the fact that the governments which had been overspending and pushed the country into indebtedness can hardly ask for sacrifices from the people.

In an interview with weekly Heti Válasz, the former World Bank Director reiterated that Hungary needed a multi-insurance model in healthcare a market-based higher education and sweeping reforms in the pension regime.

With regards to the pension system Bokros said it could not be allow leaving one third of the population wrapped in cotton and let the working people carry all burden. The current system even encourages people to withdraw from the labour market via early or disability retirement, he added.

With respect to the tax cut plans of main opposition party Fidesz, Bokros said taxes would need to be reduced but that it could not be done without holding back spending more than presently.

At a conference of the central bank (NBH) Bokros said on Wednesday that what is currently hanging over Hungary is not the threat of bankruptcy or a financial crisis but the shadow of falling behind.

Growth is hampered by Hungary's huge twin deficit and the fiscal adjustment package will make Hungary the slowest growing emerging market next year, he added.

Bokros stressed the importance of structural reforms and pointed out the quality and availability of public services have been eroding, which undermines social solidarity.

Now the parallels with Argentina's situation in 2001 do not end here. Both countries share the problem of finding themselves on an unsustainable economic path, and in need of urgent measures which go beyond what the incumbernts are (or were) offering.

In Hungary's case Bokros is right to draw attention to the fact that tax increases will only add to Hungary's problems in terms of attaining the growth which is needed to support public services. He is also right that Hungary's health and pensions systems are at the heart of the problem.

But here the situations differ. Argentina had a currency peg, while Hungary's forint is, at least in theory, free floating. However since Hungary badly needs to retain foreign investment, and also needs to keep inflation in check, there is little alternative to relatively high interest rates, but these precisely (at least for the time being) maintain the forint at a relatively high level, which of course produces the same problem in exporting which Argentina suffered. These high interest rates also make the cost of servicing the government debt rather high, and this fact alone, as we have seen here, contributes to the difficulties in reducing the deficit.

The other big difference between Hungary and Argentina is the demographic one. Argentina was a comparatively high fertility developing economy, with, by and large, the phenomenon known as the demographic dividend out there in front of it. Hungary unfortunately belongs to that group of countries who went through a large part of their demographic transition before they became economically rich. As such the future lying out in front of Hungary is inevitably a complicated one, with or without the present economic conundrum. Fertility is at the lowest-low level (or see the file linked to here) and Hungary is set to age rapidly as the currently low life expectancy rises and rises. So the demographic changes which are facing Hungary involve more of a demographic penalty than a demographic dividend.

And Bokros is right to draw attention to the social spending dilemma which Hungary faces. He is also right that the pension and health systems badly need reform. The question is, as people enter a necessary private pillar, where does the money come from to finance the earlier PAYGO system, and how do you prevent the quality and availability of public services from eroding (which Bokros says he wants to do) if what you are going to do is reduce spending on them significantly? Somehow the numbers here just don't add up.

At the end of the day all comparisons are rather limited in their value. But what worries me most here is that I just can't see a sustainable path for Hungary to take hold of, and that, believe me, is the most worrying thing of all. Simply telling people that what they need is an austerity package if you have no clear idea of how the hell it can all work is only likely to mean that you end up as Cavallo did, only as I said Hungary isn't Argentina, and the end product of all this prevarication won't be a pretty sight.

Wednesday, November 22, 2006

Democracy In Hungary

The Economist Intelligence Unit has published the latest edition of its Democracy Index. As Portfolio Hungary reports, Hungary finds itself in 38th place, tucked in amongst the flawed democracies. It should not escape our notice that another of the EUs problem economies, Italy, is also well down the list in 34th position. The fact that both these societies are struggling with their government deficit and find it difficult to create a social consensus around the measures which need to be taken (and that both lean very heavily on tax increases in their adjustment programmes)seems somehow to be deeply significant.

Indeed I was only recently commenting on the rather favourable comparison which can be made about Spain's progress vis-a-vis Italy in this regard (Spain is in 16th place in the EIU list), and here we could mention that the rather more economically successful Czech Republic is notably in 18th place and well above the flawed democracy ranking. Someone somewhere should be thinking very hard about all this.

No Euro Membership in Sight

This at least is the opinion of National Bank of Hungary governor Zsigmond Járai:

The government's present convergence program will not permit Hungary to adopt the euro, central-bank governor Zsigmond Járai said on Wednesday at a conference organized by the National Bank of Hungary on the country's past inflationary experiences.

The National Bank of Hungary previously expected Hungary to adopt the euro in 2007 or 2008, then extended the date to 2010; however it is no longer possible to tell when Hungary will be able to adopt the single European currency, Járai said. The central bank president asserted that the convergence program does not help improve the competitiveness of businesses in the country, increases tax burdens without broadening the tax base, while reducing the performance of the economy and economic growth. "Companies shouldn't calculate on the euro in their mid-term plans," Járai added.

Obviously Járai has some issues to battle out with the present government, and we shouldn't forget that only yesterday former Prime Minister Péter Medgyessy was having a go at the central bank, blaming them for their earlier monetary policy. Without entering directly into the politics of this, what Járai is saying makes a lot of sense. It is hard to see how job growth can be sustained with the present tax hike, and there is obviously going to be a reduction in domestic demand growth. But probably the most worrying issue is the present level of the Forint, coupled with the ongoing inflation, this will make exporting very hard work indeed, especially if the eurozone slows going into 2007. Clearly the central bank has a lot less responsibility for the mess than the politicians do, but the most worrying point of all is that there seems to be no direct sustainable path available for anyone to follow. I will fill in the details on this argument as we move forward. Bottom line, as the man says, don't count on Hungary joining the eurozone any time in the foreseeable future.

Paying For The Drugs

The above graphic (which comes from Portfolio Hungary) shows the relentless rise in the Hungarian drugs budget from 1997 to 2006. Now as explained in this post, Hungary is currently passing through what some have termed the second epidemiological transition. But this transition, unlike the first one, is not driven by improved nutrition in childhood and better public health, but rather life expectancy here is pushed up (from Hungary's comparatively low level of 68.45 - in the case of men) to levels which are more common elsewhere in the EU by the combined application of improved medicines and intensive medical care, both of which have significant costs associated with them. Hence the rise and rise of the drugs budget.

The big question, of course, is who will pay for this? Given the dire straits in which Hungarian public finance finds itself the answer seems far from clear, and this dilema is reflected in the current 'robbing Peter to pay Paul' tussle which the government and the major Hungarian drugs manufacturers are having.

The Hungarian Parliament has now passed what is supposed to be the final version of the new drug thrift bill. Portfolio Hungary offer a summary of just how the new regulation's impact on Hungary's listed pharmas Egis and Richter:

Key points of the Drug Economy Act:
- 12% flat rebate on all drug subsidies;
- annual HUF 5 million fee / sales representative;
- basis of producers' split payments into drugs budget is HUF 287 bn;
- joint coverage of spending overshoot by producers and state up to 9% miss (the larger the deficit, the higher drug makers' contribution is);
- full coverage of overshoot beyond 9% by producers;
- the section of the Act on the financing of the deficit was formulated highly ambiguously, but the Health Ministry confirmed that the objective of the regulation is that producers would contribute to the coverage of the deficit in ratio of the surplus of their subsidies relative to the subsidy they were granted in the previous year.

The latest development is positive for both Egis and Richter, given that the size of their subsidies will not be larger in 2007 than this year.

Just how these measures will affect the profitability and net worth of the two majors is, at this stage anyone's guess. But as Portfolio Hungary point out given the inbuilt tendency for the demand for medicines to grow it is hardly likely that the current measures will produce a net reduction in the budget:

At the same time we must keep in mind that drug subsidies have been growing dynamically for years. Annual average increase reached 17% since 1997 and has accelerated since 2001. Considering the rise in consumption in the past years we believe the government's measures would be enough only to halt growth.

Naturally the drugs majors are resisting the idea that this will be the final version of the bill going into law, and the latest news is that they have asked President László Sólyom not to sign the bill on the grounds that it is unconstitutional:

The association of Hungarian drug producers (MAGYOSZ) has asked President László Sólyom not to sign a bill on drug subsidies into law and ask for a review by the Constitutional Court, Richter has announced on Wednesday.

The association will argue that the bill, approved by Parliament on Monday, puts an unfair burden on domestic producers and generic firms and is therefore unconstitutional.

"We're still in the process of spelling out our argument but we will send him our letter today," Reuters cited spokeswoman Judit Tóth as saying.

President Sólyom will have five days from the time he received the bill to decide whether to sign the bill into law, send it back to Parliament for reconsideration or ask for a constitutional review from the Constitutional Court.

Which is all well and good, except that in the meantime someone somewhere has to decide just how the Hungarian deficit is actually going to be reduced.

Tuesday, November 21, 2006

Sustaining The Debt

Now I am not going to enter the political squabble which are going on all over the place, but I think former Prime Minister Péter Medgyessy draws attention to an important issue here: the rising cost of servicing the debt. Doubtless this was another factor in today's rate hold decision. Probably it is very unfair to blame the central bank for all these ills though, the current high rates are undoubtedly part of the general economic and financial crisis which Hungary is facing:

“The bank perfectly mistrusted the government,” wrote Medgyessy, premier from 2002 to 2004. “The unwarranted high level of interest rates grossly increased the government's expenses, chasing economic policy into a vicious cycle.” Medgyessy said the bank, which had cut its benchmark rate seven times in five months before he took office, for erasing half those cuts within three months of the vote. The former premier missed budget deficit targets every year in office and Hungary hasn't met its annual goals since. A telephone message left for spokesman Gábor Missura at the central bank seeking comment wasn't immediately returned. Public debt is set to rise to 72.3% of gross domestic product by 2008 from 62.3% last year, according to the government's projection. That's above the 60% limit for euro adoption. Medgyessy was forced out amid a coalition dispute and the lowest support for his Socialist Party in three years. He was replaced by Ferenc Gyurcsány, who led the coalition to a second consecutive term in the April election and stared measures to cut the budget shortfall, the European Union's widest. “It has been obviously proven by now that the switch of prime ministers was at the right time and was successful and fruitful for the coalition,” Medgyessy wrote. “The new government's reform momentum is unquestionable.” Gyurcsány raised taxes and cut subsidies to trim the shortfall and wants to overhaul the country's health care, education, pensions, local governments and public administration. That may be too much, according to Medgyessy. The government “is overreaching on reforms,” Medgyessy wrote. Overhauling that many sectors of the economy “isn't possible to carry out -- it results in frittering away energies and opens fronts against all social strata.” Medgyessy is now a traveling ambassador in Gyurcsány's government. He may be the premier's choice to replace central bank President Zsigmond Járai when his term expires next March, Web site Hirszerző said in April. (Bloomberg)

Meantime the comparatively high yields on Hungarian debt continue to drive the forint up:

Hungary's forint advanced to its highest in more than eight months as investors bought forint- denominated debt, the highest-yielding in the European Union.

The forint climbed for a second day as foreign holdings of Hungarian bonds surged to a record high of Ft 2.92 trillion ($14.5 billion) yesterday after the country's central bank kept its benchmark interest rate on hold at 8%. “The central bank's decision to leave rates unchanged triggered a rally for Hungarian bonds, which supported the forint,” said Martin Blum, head of emerging-market strategy at Bank Austria Creditanstalt AG.

The yield advantage offered by Hungarian debt securities is prompting foreign investors to buy forint-denominated bonds. The yield difference, or spread, investors demand to hold Hungarian 10-year debt rather than similar-maturity German bunds is 318 basis points, compared with 299 basis points six months ago.

Even as the yield on government bonds now starts to turn due to the high demand:

Hungary's Government Debt Management Agency (ÁKK) has received HUF 125.7 billion worth of bids on HUF 30 billion 3-month discount T-bills (D070228) at an auction on Tuesday. The 4.2x bid/cover ratio was not enough for the ÁKK to sell more of the instrument than originally planned.

The bills were sold at an average yield of 7.98%, down 17 basis points from Monday's benchmark fixing (of series D070314), but 6 bps up from the previous auction a week ago.

The ÁKK will offer HUF 45 bn and HUF 40 bn worth of 5-yr and 10-yr bonds, respectively at auctions on Thursday.

National Bank of Hungary Holds Rates At 8%

This decision is hardly surprising given the level of the forint and yesterdays construction numbers.

The National Bank of Hungary (NBH) has on Monday decided to leave the base rate unchanged at 8.00%.

As I say, apart from the forint this was presumeably not far from the front of their minds:

Construction sector output falls 3.3% yr/yr in August

Output volume of Hungary's construction sector fell 3.7% in September compared to the same month a year earlier, according to working-day adjusted and decreased 4.8% according to unadjusted figures, the Central Statistics Office (KSH) reported on Monday.

Compared to August, output was up a seasonally- and working day-adjusted 2.7%. In the first nine months of 2006, output volume of the construction sector fell 2.1% from the same period last year. At current prices, construction sector output was worth Ft 236.2 billion (€915.5 million) in September and it was worth Ft 1,426.7 billion in January-August.

Friday, November 17, 2006

To Raise Or Not To Raise, That Is The Question

The debate currently taking place at the Hungarian central bank (the NBH) about the future course of interest rates is simply a reflection of the cleft stick that Hungarian monetary policy finds itself in at present. Raising rates will slow domestic growth and contain inflation, but it will also push up the Forint, and hence make it more difficult to export, and exports are what Hungary badly needs right now. No easy answers here:

According to the local media, National Bank of Hungary (NBH) Governor Zsigmond Járai said that a rate increase was not the only policy option on Monday, since the HUF rally would reduce inflationary pressures. Goldman Sachs has said on Friday the statement creates some downside risk to their forecast of a 25-basis-oint hike to 8.25% next Monday, since Járai is usually relatively hawkish in his comments. Goldman Sachs, however, sticks with its view.

At the last meeting, the MPC split three ways, with the doves supporting a pause and the hawks pushing for a 50-bp hike.

“We believe Monday's hike will be the final hike of the current cycle, but see some risk that the NBH will raise rates even further over concerns that inflation expectations are becoming entrenched," Rory MacFarquhar noted.

He expects inflation to peak at around 8% at the end of the first quarter next year.

But after that, he forecasts that “the contractionary effect of the deficit reduction programme will begin to outweigh the impact of higher tax rates and administered price increases."

Ferenc Puskás and Life Expectancy

Today we learn of the sad death of Ferenc Puskás at the age of 79. Puskás was undoubtedly a great footballer (you can find an interesting page about him on wikipedia) and he will be missed by family and football fans alike. Puskás reached the comparatively advanced age of 79, and we hope he enjoyed his later life. We may also like to note that Puskás lived considerably longer than the majority of Hungarian men, since the average male life expectancy is currently some 68.45 years. And it is here that the economic part of our story begins.

Life expectancy in Hungary continues to be comparatively young by European standards, so it is to be hoped that in the coming years this situation will improve considerably, but how exactly will this improvement affect the economic outlook for Hungary, that is also the question?

Now one thing is clear, any increase in life expectancy in Hungary will come by people who are now over 60 living longer. As this happens it will be wonderful news for everyone, but in economic terms this will have an important on cost, since it will involve a considerable expenditure in medical care and medicine, and it is just the question of who is going to pay for this which is the subject of considerable dispute between the Hungarian government and the pharmaceutical companies:

“We see if the modification would get approved it could lower the payment obligation of both Egis and Richter arising from tax on drug subsidies to HUF 1.5bn (when compared to the earlier version of 14%-16% tax resulting in HUF 2.0bn) and to HUF 2.4bn (when compared to the earlier version of 14%-16% tax resulting in HUF 3.3bn) for 2007 respectively," KBC's Barbara Jánosi said on Friday.

She added this step would be only a little positive development for these two companies when compared to substantial increase seen in their payment obligation from co-financing the gap of the drug subsidy budget.

According to the Parliament's latest decision, next year's drug subsidy budget target will be HUF 287 billion when compared to HUF 364 bn reported earlier by the Finance Ministry.

“We see the lowered target could lift substantially the budget gap for next year resulting in higher payment obligation for drug makers (if no changes will be in the distribution principles of the gap between industry participants)," Jánosi added.

Now it is clear that with this current comparatively low life expectancy some considerable improvement is to be hoped for and expected. If we take a look at a comparable society, the old east Germany, we can see that such an improvement can occur relatively quickly, if the right care and clinical environment is available.

Last year I had a post about this situation on a Fistful of Euros, based on a paper by the German-based researcher Marc Luy. Essentially the point is that after years of life expectancy divergence, the two societies - East and West - converged again comparatively rapidly in the 1990s based largely on what Luy calls the availability of nursing care:

“The demographic changes and developments in Eastern and Western Germany are generally seen to offer a unique possibility to understand the interaction between societal, social respective economic conditions and population processes. Almost identical demographic composition and behaviour until 1945 were followed by 45 years of life under different political and socio-economic structures resulting in completely different demographic conditions…. With Reunification in 1990 the population in Eastern Germany returned to the Western societal and economic system what caused sudden changes in all its demographic developments. These special preconditions lead some scholars to describe the Eastern German population as a kind of 'natural experiment' generated a large number of researches about changes in Eastern German demography.”

“In the field of mortality research especially the rapid convergence of survival conditions since 1990 following roughly two decades of continuous divergence are subject of central interest. The fact that both, the former increase and the recent decrease of the life expectancy gap between West and East Germany were mainly caused by age groups between 60 and 80 led to the central message that "it's never too late" for increasing length of life.”

So on the face of it a convergence of Hungarian life expectancy towards levels which are regarded as rather normal in the West European parts of the EU is to be expected, but we need to think about how this can be paid for.

Now many attribute Germany's current public finance problems to the incorporation of East Germany, and this view is *both* right and wrong.

It is wrong in the sense that it doesn't take account of the fact that ageing is an *all Germany* phenomenon, but it is right that the rapid increase in life expectancy that took place in East Germany in the 1990s simply piled on, and piled on the costs, and this must be a big part of the current financial crisis that the German health system is experiencing.

So all I am saying at this point is that the sum total of these effects will make the managing of the Hungarian deficit issue a bigger rather than a smaller headache, and the sooner the body politic in Hungary wakes up to this the better.

Fitch On Hold

The credit rating agency Fitch are adopting a wait and see attitude towards Gyurcsány's reform package before taking any decision on an adjustment in the sovereign rating:

Hungary's credit rating depends on Prime Minister Ferenc Gyurcsány's ability to push his fiscal reform package, Fitch ratings agency's sovereign ratings analyst Edward Parker said on Friday.

"We think they will make some good progress but the Prime Minister's lie dented his personal authority and obviously implementing the policies are unpopular," Reuters cited Parker as telling reporters at a Fitch conference on emerging markets.

Fitch has assigned Hungary a sovereign rating of BBB+ with a negative outlook.

"The rating depends on if the prime minister can reduce the deficit and stabilise the economy. We think the government can make progress on reducing the deficit. Our central scenario remains that they reduce it from 10% (of GDP) to around 4.5% to 5% by 2008," Parker said.

Thursday, November 16, 2006

Wages, Budget Deficits Etc

The principal news today is that real wage growth slowed year-on-year in the period between January and September 2006. This is hardly surprising, but equally it would be even more surprising if real wage growth in the coming six months didn't slow considerably more.

Hungary's September gross wages slowed significantly to 7.1% year on year from 10.8% yr/yr. The deceleration was more meaningful in the private sector (down to 7.6% yr/yr from 11.7% yr/yr). Public sector wage growth also moderated to 6.9% yr/yr from 9.3% yr/yr.

If we take into account inflation, then obviously real wage growth is considerably less:

Real wages in Hungary rose 4.8% yr/yr in January-September 2006, based on an 8.0% increase in net monthly wages from the same period of 2005 and an average CPI of 3.1%, the Central Statistics Office (KSH) announced on Thursday.

In fact if we look at what has been happening more recently we will find that real wages are now actually falling:

In September alone, real wages dropped 1.8% year on year, Econews calculated, based on a 4.0% year on year rise in net wages and twelve-month CPI of 5.9% in September.

As István Zsoldos from Goldman Sachs observes:

“These figures are still relatively high, although lower than the August ones that were boosted by bonus payments ahead of wage tax increases."

“We think that the NBH will remain worried about inflation expectations becoming entrenched and will hike rates by another 25 bps next Monday. Currently we are forecasting that this is going to be the top of the hiking cycle, but there is still a significant risk that the NBH might go further."

“Inflation will only peak in March next year, at around 8%, and worries about inflation expectations picking up will not go away at least until then, in our view."

Which all means than many think (and I concur) that the National Bank of Hungary is more than likely going to raise rates on 20th November:

The Hungarian statistics office's Tuesday report about a pick-up in inflation in October (6.3% vs. 5.9% in Sept ) and the forint's gradual strengthening against the euro have not changed the consensus estimate in merit that Portfolio.hu's poll showed on Monday. In that survey analysts have projected that the Monetary Council will raise the base rate by 25 basis points to 8.25% on 20 November. At the same time it is a crucial change in views from a month ago that now the respondents believe the end of the central bank's (NBH) rate hike streak will be reached this month.

Meantime the finance ministry is highlighting the fact that they will post (unexpectedly) a deficit in December:

In a rather unusual move, Hungary's Finance Ministry has on Thursday projected HUF 24.9 billion public sector deficit for December 2006 (cash based, excluding local governments), while in the last month of the year, the budget generally posts a surplus over booming tax and contribution revenues. Due to a technical reason, it will be different this year.

A little embarrassing this 'technical' detail, especially since Moody's have just made it known that some of their officials are currently on a visit to Hungary, of course there is nothing to worry about, since this is simply a 'regular' visit (hmm, hmm):

Officials of ratings agency Moody's are on a visit in Hungary, Finance Ministry spokesman Ferenc Pichler told on Thursday, adding that this is but one of the regular meetings between ratings firms and the government.
"This is nothing extraordinary. Delegations from credit rating agencies come regularly," Pichler said, adding that officials from another rating agency were in Hungary on Wednesday. On 25 September, Moody's Investors Service placed Hungary's A1 local and foreign currency government bond ratings and its A1 foreign currency bank deposit ceiling rating on review for possible downgrade. This is three notches better than the rating of Standard & Poor's and Fitch. The agency has not changed the rating since 2002, but moved to negative outlook in February. István Zsoldos of Goldman Sachs said than that Moody's statement made it "very likely " that there would be a downgrade, adding that the question was whether it would be a one- or two-notch move. Pichler declined to comment a question whether there was a connection between the negative outlook and the visit of Moody's officials. (portfolio.hu)

Wednesday, November 15, 2006

From The Analysts

Portfolio Hungary published some of the analyst comments on the third quarter GDP data. István Zsoldos from Goldman Sachs seems pretty much to the point:

“The impact of the fiscal restrictions (which started in September) is still fairly limited in the Q3 figures."

“Wage growth was very strong before the September wage tax increases, and in our view that was the reason why consumption is probably still holding up (there is no detailed breakdown published at this release)."

“Private sector investment was surprisingly weak in Q2, and this component might have shown a rebound in Q3 as well."

“Overall, the Q3 data is going to be less important than the later quarters because the most significant question is how households are going to react to the full impact of the fiscal tightening. We expect to see signs of a serious slowdown in the Q4 data."

So the impact of the tightening is yet to make itself felt. Raffaella Tenconi from Dresdner Kleinwort seems excessively optimistic:

“Given the prospects for continuing buoyant eurozone growth, which will support exports, and rapid wage growth, supportive of consumer demand, growth is likely to decelerate only gradually in the near term."

The outlook for eurozone growth is much more uncertain, in particular see this from Claus Vistesen.

Healthcare in Hungary

One of the big topics I have yet to get into relating to the Hungarian situation is the demography. This will come a bit at a time as I ease myself in. But two factors evidently stand out here, the health care and the pensions system.

On the health front one of the factors which indicates the importance of demographic processes in the Hungarian situation is the relative importance of the big pharmaceutical companies (Richter Gedeon, Egis etc) in the economy and in payments to these companies in the general government finances picture. Many have spoken about the 'demographics' (as opposed to the demography) of ageing in terms of the 'product mix' that will be a feature of the consumption process, and here pharmaceutical products loom large (and this despite the fact that life expectancy in Hungary at 72.66 is still comparatively young by European standards, a detail which means that there is plenty of scope - as we have seen in East Germany - for extending life expectancy by intensifying medical care, but this of course, again as we are seeing in Germany, is expensive, very expensive). What many fail to note about the situation is the structural aspect, ie that there is s shift in consumption away from those who are able to pay towards those who need others to pay (either the state or children). This will have important macro economic consequences.

Some measure of the situation can be found in this Portfolio Hungary article from the end of October:

Hungary's drug subsidy budget will be 364 billion forints in 2007, below the expected 2006 spending of HUF 380 billion, Finance Ministry spokesman Ferenc Pichler told Portfolio.hu on Monday, confirming earlier press reports.

The HUF 364 bn figure is well above the HUF 320 bn most analysts and drug sector experts had expected for next year, and is obviously positive for producers. However, it is yet to be seen on Tuesday what gross budget, which excludes producers' contributions, the ministry expects for 2007. This information is to be of huge importance for pharmaceutical companies.

The higher-than-expected figure, or a lower-than-expected gap of the drug subsidy budget, is likely to reduce the expected contribution of the biggest listed producers, Richter and Egis, to the subsidy budget.

According to earlier press reports, the drugs budget was to be HUF 320 billion and the effective subsidy would have been HUF 440 bn in 2007. In this case, the contribution of producers would have been substantial, given that the National Health Insurance Fund (OEP) and the producers will jointly pay for an overshoot of the budget up to 9%, while any excess budget overspending above 9% will be solely covered by drug makers.

A budget of HUF 364 bn means that producers will not have to cover the overshoot fully up to HUF 467 bn worth of subsidies. As this year's effective subsidies are to reach HUF 380-400 bn, an overshoot larger than 9% is highly unlikely for 2007. (In other words, we do not believe next year's gross deficit will be over HUF 467 bn.)

Now at this point I am still really informing myself, and am not yet clear what the final details of the health budget for 2007 actually are (we won't know this till the final vote on Nov 20 it seems), but one thing is for sure, the cost of these subsidies is an important part of the public finance picture, and that reducing the subsidies significantly will hit the pharma sector hard, and by a knock-on effect the economy generally.

There is more news on this today:

Yet another amendment was made to Hungary's healthcare bill that may force pharmaceuticals to pay more into the drug budget in 2007 than planned in an earlier legislation, according to a Tuesday report by news agency Bloomberg.

Portfolio Hungary comments:

Unfortunately we find it impossible to determine which of the above proposals the committee wants to submit to Parliament. However, we would not be surprised if further modifications were made until the final vote on 20 November. Based on the current proposal, producers would have an easy job cutting their clawback - they would simply need to reduce the number of pills in boxes.

At the moment, it is also impossible to quantify the impact on the profits of either Egis or Richter.

The current uncertainties will not simply evaporate even after the bill is passed, since the size of clawback will depend on actual consumption, which cannot be assessed accurately as it hinges on different future measures that impact demand.

So the situation is a very uncertain one, but do not miss this point:

However, we would not be surprised if the act in the end would not contain a clawback obligation based on subsidy brackets. In this case, drug producers would simply need to lower the content of boxes to curb their payments into the National Health Insurance Fund (OEP).

So you can sell less for the same price. This seems to be yet another round of the 'stumbling and mumbling' which seems to have characterized the main approach to this crisis to date. Of course there must be many cases of 'inefficiency' in drug provision, with people getting more medicine than they need, but there must also be many cases of people actually needing the medicines they are prescribed, and in these cases if each box contains less then they will simply need to have more boxes, and especially in the critical non-generic sector, which is why, I suppose, there is so much uncertainty about the final costs and savings involved in the exercise. The whole approach smacks more of 'robbing Peter to pay Paul' than of anything else. And, I repeat, all of this seems set to have important and ongoing macroeconomic consequences.

Hungarian Forint

The forint reacted positively to yesterday's GDP and inflation news. Since the news wasn't exactly unequivocally good I can only read this as suggesting that it wasn't as bad as it might have been, but these are early days still. Obviously one way to read this reaction is that people imagine the central bank will still raise interest rates, and that the relatively poor eurozone performance might mean that the ECB will not raise very much, but this is still far from clear (Claus Vistesen has some interesting comments on this situation). Obviously in the short term any increase in the interest rate differential would be forint positive, but this would not necessarily be good news for GDP growth inside Hungary, since given the expected weakening in internal consumer demand and the programme of government cuts Hungary badly needs to export, and with the forint at these levels (and possibly the eurozone slowing into 2007) this isn't necessarily going to be at all easy.

I have included a one year yahoo finance chart on the movement of the forint in this post, and it is clear that the forint has recovered most of the ground lost in the summer, so there will not be so much competitive advantage to be extracted, which makes, quite frankly, the current high inflation levels rather worrying. Bottom line: you need to think about the complete macro picture to see what is happening here.

Following October inflation figures and Q3 GDP data published this morning, the Hungarian forint broke out of its 258.50-262.00 range it has been confined to this month. The HUF firmed to 258 against the euro, a level not touched since mid-March. In late afternoon trade the forint was seen stabilising at 258.00/50 to the EUR.

The October inflation data (+6.2% yr/yr vs. 5.9% in Sept) prompted market participants to put off their expectations for the end of the rate hike streak a little bit further in time. The figure hints that the Monetary Council will decide on yet another 25-bp hike to 8.25% at its 20 November policy meeting.

Tuesday, November 14, 2006

October Inflation Numbers

Well inflation in October was just a touch higher than expected:

Hungary's consumer prices climbed 6.3% year on year in October, up from a 5.9% increase in September and overshooting analysts' consensus estimate of 6.2% in a Portfolio.hu poll conducted on Monday.

Even though this number was only very slightly above forecast it is hardly good news, since it will put pressure on the central bank to raise rates. The only saving grace in all this is that the ECB may come under increasing pressure not to raise rates further as economic growth and investor confidence in Germany deteriorate and this possibility, if confirmed, will put sort of floor under the Forint. However such a move would have to come over the protesting bodies of Trichet and many others at the ECB who keep insisting that inflation is still the primary threat. As I keep saying on my own blog, someone somewhere is going to have a hell of a lot of humble pie to eat at some point.

But even this possibity is very much a double edged sword, since slowing growth across the eurozone won't help Hungary to raise exports, which is something she badly needs to do. This is the meaning of being between a rock and a hard place.

Hungarian Third Quarter Growth

Well year-on-year growth is slowing slightly, but hardly exceptionally so. This is neither surprising nor exceptional, but it is the first piece of hard data. The important question is still what happens next, as interest rates and the government 'correction' programme start to bite.

Hungary's gross domestic product grew by 3.6% year on year in the third quarter of 2006, according to first estimate figures released by the Central Statistics Office (KSH) on Tuesday. In Q2 the country's economy grew by 3.8% in annual terms.

The Budapest Business Journal have some useful background data:

„It can only turn worse in terms of growth,” said Lars Christensen, an analyst at Danske Bank S/A in Copenhagen. „Either the government moves ahead with the reforms that would implement a significantly tighter fiscal policy that would mean a slowdown in domestic growth. And if they don't, then we will have financial turmoil that will have the same impact.” Gyurcsány pledged to narrow the budget shortfall in the face of threats that the EU would cut off aid. Monetary Affairs Commissioner Joaquin Almunia on October 10 issued a final warning to the government to comply with the bloc's fiscal regulations. The EU's procedures for halting aid are in place and the commission „can't ignore” that possibility, should Hungary fail to deliver on its budget plans, Almunia said during a visit to Hungary on November 8. At stake is €8 billion ($10.3 billion) for motorways, railroads, schools and hospitals.....

The country now relies on exports from the local units of foreign companies and domestic manufacturers such as drugmaker Gedeon Richter Nyrt and plastics manufacturer BorsodChem Nyrt to drive economic growth. Their output helped keep growth rates above the EU average while consumer demand fell, analysts said. „Net exports were the main driver of growth, even stronger than in the Q2,” said Pugacewicz-Kowalska. Industrial production was an average 10.9% higher in the Q3 than in the same period last year, accelerating from 8.7% in the Q2. Taxes also rose for consumers, including an increase in the value-added tax rate that sapped disposable incomes. Spending power was further weakened when the government raised the price of products such as electricity, natural gas and medicines. Consumer confidence fell to minus 51.1 in September, the second-lowest level on record, surpassed only by a minus 51.5 mark in June 1996 that followed an austerity package.

Monday, November 13, 2006

Ecostat Forecast

Ecostat see the Hungarian economy growing by 2.8% in 2007. This seems way on the high side for me. The key issue looks set to be the monetary tightening needed to contain inflation pass through and the cuts in consumption (both public and private) that are a by-product of the correction programme. I won't offer an estimate of my own yet, we need to see some real GDP data, and I need to get a better feel of things, but I think it is so, so important in economics to remember that there are time lags. So monetary policy put into practice today will only really take effect out in March or April, etc etc.

Hungary's economy will growth by 3.9% in 2006, more moderately than in 2005 (4.1%), local think tank Ecostat has said on Monday in its latest economic forecast. Nevertheless, growth will drop sharply to 2.5-2.8% in 2007, the researcher added.

Both export and import growth will be larger this year than in 2005, but decline again next year, Ecostat noted.

The researcher sees this year's public sector deficit reaching 10.2% of gross domestic product, but noted the austerity measures could push down the gap to 6.2%-6.8% of GDP in 2007. The government's target is 6.8% for next year and 3.2% for 2009.

The Ecostat noted that details of the government's reform measures would be known in detail only next year and the planned steps would first start to bear fruit in the second half of 2007 or early 2008.

This is one of the key points:

The think tank puts this year's household consumption growth to 2.1% yr/yr (vs. 1.4% in 2005) and expects it to decline to virtually zero (0.0-0.4%) in 2007.

The thing is it isn't at all impossible for household consumption growth to drop into negative territory next year.

Also worthy of note is that they are only expecting a small drop in the level of the trade deficit. In this case the numbers simply don't add up, and they should know that:

The Ecostat expects the current account deficit to drop to 6.6% of GDP this year from 7.0% in 2005 and drop to 6.0% next year.

Gas Subsidies To Go

This in principle is an intelligent move since there is no real justification for the use of such subsidies, the problem is though that all of this is happening at once, and someone, somewhere is going to have to pay these increases off a salary that isn't rising.

The Hungarian government plans to increase household natural gas prices by up to 72% as of January 2007 as part of its endeavours to cut budget subsidies, local broadsheet Népszabadság has reported. According to the paper, the cabinet is to replace universal consumption-based natural gas subsidies with subsidies that are targeted to low-income groups and based on per capita income.

The subsidy reduction is part of the government efforts to reduce gas subsidy spending from this year's HUF 160 billion to below HUF 120 bn in 2007.

While the price for the most needy will remain unchanged, the tariff for the first 1,500 cubic metres of gas consumed will go up by over 70% for high-income groups. The changes to be announced at the end of November affect some three million consumers.

The subsidy cuts are part of the government efforts to curb gas subsidy spending from this year's 160 billion forints to below 120 billion in 2007.

An Interesting Week For Data

This promises, as Portfolio Hungary notes, to be a very interesting week for Hungarian data:

14 November, Tuesday

09:00 Consumer prices, October - Central Statistics Office (KSH)
Forecast: +6.2% yr/yr; Previous: +5.9% yr/yr

09:00 Gross domestic product, Q3 - Central Statistics Office (KSH)
Forecast: +3.7% yr/yr; Previous: +3.8% yr/yr

12:00 Auction of 3-month discount T-bills (D070221) - Government Debt Management Agency (ÁKK)
Offered amount: HUF 30 bn
Previous auction - Bids: HUF 124.95 bn; Average yield: 8.09%

12:05 Results of two-week depo tender - central bank (NBH)

15 November, Wednesday

08:30 Credits of non-financial corporation sector by branches, Q3 - NBH

09:00 Industrial output, September - Central Statistics Office (KSH)

12:00 Auction of 6-month discount T-bills (D070509) - Government Debt Management Agency (ÁKK)
Offered amount: HUF 35 bn
Previous auction - Bids: HUF 87.2 bn; Average yield: 8.29%

16 November, Thursday

08:30 Households' preliminary financial accounts, Q3 - NBH

09:00 Number of employed and wages in the national economy, Sept - Central Statistics Office (KSH)

10:00 Debate on 2007 budget bill commences in Parliament

11:00 Press conference on public sector's October performance

12:00 Auction of 12-month discount T-bills (D070509) - Government Debt Management Agency (ÁKK)
Offered amount: HUF 40 bn
Previous auction - Bids: HUF 105.2 bn; Average yield: 8.24%

Wages, The Other Side of the Coin

Obviously part of the 'recovery path' in Hungary will involve trying to hold wages steady while prices 'burn off' the impact of the forint drop. Clearly Hungarian workers and their unions are non too happy about this. This policy has a name: deflation. Unfortunately given the gravity of Hungary's present situation there is little alternative, although quite how all this is going to work out in practice is anyone's guess. I think we are all a bit short on real policy options at this point.

Public sector unions protested plans by the government to raise wages just 0.2% in 2007 in a letter to Prime Minister Ferenc Gyurcsány on Thursday.

The unions argued that public sector workers would take home 10% less in real terms with the nominal wage rise, given the rise in taxes and the projected upsurge of inflation. They urged the government to raise wages by an extent that would cause real wages to fall no more than the average for both public and private sector workers.

The unions will take legal steps if the prime minister fails to respond to the letter by November 14.

Food Prices in Hungary

This little piece of news may not seem especially important, but actually it forms a central part of the process which is now taking place in Hungary:

Hungary's farmgate prices increased by 13.5% year on year in September, the Central Statistics Office (KSH) reported on Thursday. In August, agricultural PPI was up 10.3% yr/yr.

Farmgate prices rose by 9.4% yr/yr in Q1-Q3, up from an increase of 8.1% yr/yr in the January-August period, the KSH added.

Excluding fruits and vegetables, agricultural producer prices were up by 12.3% in September and rose by 7.6% in January-September, which compare with a 10.9% and a 6.8% yr/yr increase in the in the first eight months.

The price level of grains jumped 23% yr/yr in September and was up 16.2% in Q1-Q3 (vs. a respective growth of 24.7% and 16.4% a month earlier).

So the decline in the forint is now making its presence felt in an important way. It is hard to say how much of the inflationary pressure is due to rising costs of raw material imports (fertilisers etc) and how much to upward wage pressure due to the rising cost of living. This is why, however, the central bank will retain a tight control on interest rates. Since the impact of this tight monetary policy will be to squeeze inflation by squeezing domestic consumption (this is called keeping hold of the pass-through), the outcome is reasonably predictable: domestic demand will start to decline. This is where the 2007 recessionary danger comes from. The issue hangs on how much Hungary can support the downturn in domestic demand by increasing exports (but remember the global growth climate is weakening, and especially in the key eurozone economies) and how much internal invesment can be stimulated since these are the three legs (domestic consumption, exports and investment) on which an economy stands (in sum they could be termed 'aggregate demand').

This kind of annual rate of increase in basic food costs is clearly going to bite into the wage packets of the average worker, and at the same time government spending, which could normally be used counter-cyclically, will be under severe restraint. Not an easy situation, and the downside risks here seem to be very high.

Thursday, November 09, 2006

Industrial Production September

According to provisional data industrial output was up 9.0% y-o-y in September:

Hungary's industrial output rose by 9.0% year on year in September, according unadjusted data, while figures adjusted for working days indicated a 11.6% growth, the Central Statistics Office (KSH) said on Friday. The growth, both adjusted and unadjusted, in August was 9.0% yr/yr.

Output went up by 10.1% yr/yr in January-September, against a 10.3% yr/yr increase in January-August, the KSH added.

According to figures adjusted seasonally and by working days, the statistics office has detected a 3.1% growth from August, versus a 2.2% m/m drop in August.

It is hard at this point ot assess the significance of this data.

Foreign Reserves Position

Hungary's foreign currency reserves dropped by EUR 146 million to EUR 16,387 million during October, according to the National Bank of Hungary.

Basically reserves have been dropping since the end of March (1,442 million euros), but we are still up 661 million euros from December 2005.

September Trade Deficit

Hungary's trade deficit in September was €116 million, or €6 million more than in same month a year earlier. The trend over the first 9 months of the year is however downward, but the September data point still indicates how dependent the future evolution of the balance of trade is on the relative evolution of import and export prices.

Hungary's trade deficit was €116 million in September 2006, €6 million more than in same month a year earlier, according to a first estimate published by the Central Statistics Office (KSH) on Thursday.

The January-September trade deficit was €1.795 billion according to the preliminary figures, still €377 million less than in the same period of 2005. September exports totaled €5.185 billion, up 6.6% from a year earlier. Imports grew by 6.5% in twelve months to €5.301 billion in September. The pace of both exports and imports dropped considerably from August when euro-term exports rose 15.3% and imports rose 9.4% year-on-year. Nine-month exports rose 14.8% year-on-year to €41.794 billion, and nine-month imports rose 13% year-on-year to €43.590 billion. European Union member countries had a 74% share in Hungary's exports and a 68% share of its imports in September, KSH said. KSH will publish detailed and revised September trade figures on December 1.

Update: Portfolio.hu has some more instant analysis on this:

Both exports and imports slowed considerably in September to 6.6% yr/yr and 6.5% yr/yr, respectively. In August both figures were still above 10% yr/yr....."The YTD improvement of the trade balance is on the back of strong export results and partly on weak HUF in those months."

It is very hard to call this situation at the present time, but if the eurozone economy is slowing, and all the indications are that it is, then raising those export numbers in a weak external environment may be quite uphill work in 2007.

GDP Shares

Here are some interesting data points:

GDP created by the TOP 100 companies increased by 12.7% in 2005 compared to the previous year, while the entire commercial sector reached only 7.5% growth in total, according to the survey of economic analysis institute Ecostat.

This means that the largest companies increased their share of the GDP: in 2005 they created 39.8% of about Ft 10,000 billion total GDP generated by the enterprises; a year before that was only 37.4%. Even among the top 100 the largest companies are increasing their importance: the Top 11 generated as much GDP as the remaining 89.

The TOP 4 remained the same (Mol Nyrt, Magyar Telekom Nyrt, GE Hungary Zrt, Audi Hungária Kft); last year’s number five, T-Mobile Hungary Rt has been merged into Magyar Telekom. IBM Data Storage Systems Kft managed to develop the most; it jumped from the 62nd position of 2004 to 21st last year.

Obviously Mol Nyrt, Magyar Telekom Nyrt, GE Hungary Zrt, Audi Hungária Kft are the ones to watch.

The Longer Term Budget Outlook

One further point from Central Bank Vice President Henrik Auth's interview for the BBJ is the following one:

"By 2008, 2009, the deficit-cutting effect of the austerity measures will run out of steam......Cutting current expenditures should have been a priority. The emphasis should have been on social transfers.”

Now this seems to raise one of the major outstanding issues, the structural sustainability of the budget in the longer term due to the presence of what Alan Greenspan used to call 'accrued liabilities' - structural items in the budget like health spending and pensions - which are set to grow and grow as Hungary ages rapidly over the next decade.

Now this meshes-in with the politics, as revealed by this article in Bloomberg, which is ostensibly about the future of Fidesz leader Viktor Orban, but in reality raises much larger questions. In particular what exactly is the position of Fidesz in relation with next years referendum on reductions in the health and welfare programme:

When those failed to unseat the government, on Oct. 23 he called for a referendum, now planned for February or March, on the government's plans to reduce spending on social programs, including imposing fees for doctor visits.

So what is the Fidesz position on budget stability? In theory they should favour trying to bring spending in the longer term under control. But this may not prove popular with voters who are getting older by the year, so they could seek to gain short term advantage by exploiting the unpopularity that such measures will undoubtedly bring on Gyurcsany (remember what happened to Schröder in Germany) at the price of long term insolvency for the country.

This is the point, as we are now seeing in Italy, where politics fuses with economics. And the recent performance of Angela Merkel in Germany is none too encouraging in this regard.

So the current risks in Hungary are twofold: that the immediate package (spending cuts, drop in the value of the forint, rise in interest rates) provoke a decline in domestic consumption which is sufficiently strong to send the country into recession, and in so doing make it difficult to comply with the original terms of the rescue, *and* that the emphasis on short term management makes the longer term path of public spending lie on a constant knife edge, making for permanent difficulties in balancing political governability and economic systainability.

Wednesday, November 08, 2006

Hungarian Interest Rates

Hungary needs to keep raising interest rates. At least that is the opinion of central bank Vice President Henrik Auth. The big question is the pass-through rate from the devaluation of the forint. One of the ways top contain this is through a policy of monetary tightening, the difficulty is that this also slows down private domestic consumption, something Hungary may well be in need of to cushion the impact of the reduction in government consumption.

Policy makers, who next meet on November 20, have raised the two-week deposit rate to 8% on concern Prime Minister Ferenc Gyurcsány’s efforts to cut the budget deficit will push inflation above the central bank's target. The government has cut spending and increased the value-added tax and regulated energy costs to slash the deficit from 10.1% of GDP forecast this year to 6.8% in 2007. Higher taxes and bigger utility bills sparked inflation and may force the country to delay adopting the euro beyond 2010. A rate increase „is of essential importance in maintaining the credibility of the inflation target,” Auth said in an interview in Budapest on October 31. „On the monetary policy's time horizon, we still haven't reached price stability. An unfolding of second-round effects and a shift in expectations could be very dangerous and we must do something.” Inflation is accelerating from a 34-year low in April after the government raised taxes and increased the price of natural gas, electricity, medicines and public transport. The central bank wants to keep the annual inflation rate, which rose to a two-year high of 5.9% in September, between 2% and 4% through 2009. It forecasts a 4.2% rate for the end of 2008, according to its August report.

Even after the forint rose 7% versus the euro and the price of crude oil declined 20% since the report, the inflation outlook may not have improved significantly, Auth said. „I don't see a marked shift right now,” Auth said. „The current downward risks and the simultaneous unquantifiable upward risks of expectations make the situation quite uncertain.” A pickup in core inflation, which strips out volatile food and energy prices, and faster-than-expected wage increases suggest continued inflationary pressure, Auth said. The measure rose to 4% in September rose to 4%, the highest in 21 months. August gross wages rose 10.7% from a year ago, the fastest rate since January 2005. The central bank's 13 policy makers remain divided over the interpretation of that data, the inflation outlook and the necessary monetary policy response, Auth said. Hungary needs to tackle spending on pension, health care and education to make the effects of deficit cutting last, he said. The tax increases threaten to slow economic growth, encourage tax evasion and lower employment, making it difficult for the government to maintain revenue growth, Auth said.

2007 Fiscal Targets

The EU Commission is skeptical about the realism of the current 2007 budget target:

The European Commission forecasts that Hungary's public sector deficit will hit drop to 7.4% of GDP in 2007 and 5.6% in 2008 from this year's 10.1%. The Convergence Program adopted by government sets targets of 6.8% and 4.3% of GDP, respectively. The Commission expressed doubt about whether the planned savings in government consumption and social spending would be achieved.

The Hungarian government doesn't agree:

The Hungarian government has on Monday insisted that its 2007 public sector deficit target of 6.8% of GDP was realistic and said European Commission projections of a higher deficit did not take into account all spending cut measures.

Actually the EU Commission's record in controlling member state budget deficits isn't exactly impressive, while the reliability of official Hungarian government statistics is also hardly beyond question at this point, so it is hard here to know whose version to accept. Going forward we shall see, I suppose.

In the short term the deficit seems to be falling within the target range, although this was to be expected as they would have been stupid not to have been rather conservative in their estimates (in VAT returns for eg). The big test will come if the domestic economy seriously slows as we go into next year.

Hungary's fiscal deficit was Ft 52.4 billion (€193.8 million) in September, the Finance Ministry announced late on Tuesday.

The deficit figure is Ft 10.4 billion down compared to the Finance Ministry's latest target published on October 16. Central budget deficit of Ft 61.7 billion was Ft 13.3 billion higher than forecast while social insurance funds registered Ft 1.7 billion surplus last month as against a Ft 11.6 billion deficit forecast. Hungary’s cash-flow-based public finance deficit was Ft 1,509.6 billion in the first ten months of the year, 86% of the annual target.

The big difference between the EU Commission forecast and the Hungarian government one is that the former only takes account of the July 2006 measures and not the October 2006 revisions to the budget text.

First Impressions

Well since I need to be pretty up front in saying that at this point in time I have next to no specific idea about or feeling for the Hungarian economy, perhaps you will ask, and you would have every right to do this, what the hell am I doing here. This would be a good question.

All I can say is that I have some very general understanding of macroeconomic processes, and how things work, and that I am struck by the situation in Hungary, by how complex it is, by how many people's aspirations are tied with in the hope that all will be well as it ends well, and how difficult it is to foresee that sort of outcome.

Maybe at this point I should put on my CD of Bartok's quartets (actually at this point they have a piano concierto from Shostakovitch on the radio, I certainly hope that isn't a portend).

Anyway, here we go, and wish me luck.

Well the first port of call is undoubtedly the very useful Portfolio.hu, which is a mine of financial and economic opinion and information. Today, for example, I learn that the Hungarian government is now offering to ease up on that unpopular 'solidarity tax' which had been looming over international companies with investments in Hungary and the imminent introduction of which had lead Audi to place a complete freeze on all future investment in the country, something which today's measure is intended as a response to:

Hungary's government has decided on Wednesday that corporates will be allowed to write off their research and development expenses from the tax base of the “solidarity tax" that was implemented on 1 September, government spokeswoman Emese Danks told a press conference on Wednesday.

The decision to go soft on the new tax was triggered by Audi's recent decision to suspend investments in Hungary until it comes to terms on the solidarity tax and other tax-related issues with the cabinet.

The 4% solidarity tax is payable on top of a 16% corporate tax and its base is the pre-tax profit.

However, Audi, which spends about HUF 250 bn on investments in Hungary a year, is exempt from corporate tax until 2011.

Now the base of both the 16% corporate tax and the 4% solidarity tax will be a tax base that excludes R&D spending.

The cabinet had earlier said the solidarity tax would bring HUF 150 billion to state coffers, which figure has today been revised upward to HUF 170 billion. Taking last year's R&D spending into consideration (cc. HUF 100 bn), the allowance will cost the budget some HUF 5 billion next year.

Now this decision is certainly a stand-down for PM Gyurcsány who had been insisting on the full application of the tax, and it isn't clear to me, as a newcomer to all this, just what relations are like between Gyurcsány and his economics minister János Kóka, doubtless i will get hold of this as I advance. OK, that will do to get me started.